US-China relationship in a fog of war

Recent events in the domestic politics of both countries have added another complicating factor to this pivotal “G2” relationship. In China, widespread protests against harsh Covid-19 lockdown policies have generated a source of domestic instability that Beijing wishes to nullify. Even after Covid-19 measures have been lifted, Beijing will now be more occupied with managing a renewed Covid wave. Ian Johnson, senior fellow for China Studies at the Council on Foreign Relations, says that this could result in a “turbulent new era” for Beijing.

“Even if he [Chinese President Xi Jinping] lifts the zero-Covid restrictions, the economy is likely to get only a temporary bounce. Barring a sudden conversion to reforms, Xi is likely to find that his next five, 10 or more years in power are plagued by increased unease in the population and further outbursts of protest spurred by other crises that will inevitably arise,” writes Johnson in Foreign Affairs.

Taylor Fravel, a professor of political science at MIT, writes that China tends to compromise on territorial disputes when party unity is weak. A greater perceived threat of popular discontent at home may similarly make Beijing less hawkish. It is highly unlikely that Beijing will seek to launch a diversionary war on Taiwan given the massive cost of doing so, notes Brookings Institution senior fellow Michael O’Hanlon. Russia’s misadventure in Ukraine may also prove a cautionary tale against similar attempts to reunify Taiwan with the mainland.

“I do not think this will present a significant challenge for China’s foreign policy. We are seeing some reference to ‘external forces’ as fomenting the unrest but even within China, this argument is fairly unpersuasive. It will present itself [as] more of an unexpected problem for Xi to deal with and I think they will be able to stamp out the protests in time to come.” says Dylan Loh, assistant professor at Nanyang Technological University (NTU).

See also: Will China try to invade Taiwan?

On the US side, the country has just emerged from a hotly-contested mid-term election, with the Republicans just winning back control of the House. While the Republicans will undoubtedly prove a thorn in US President Joe Biden’s side, his foreign policy towards China is unlikely to be affected. After all, says Nick Marro, lead analyst, global trade, at the Economist Intelligence Unit (EIU), the only thing that Democrats and Republicans can agree on is that the US should adopt a hawkish attitude towards China.

“Republicans, as a group, are likely to support Biden’s policies toward China, though they may still cause him heartburn. They could hold hearings on whether the Covid-19 epidemic was caused by a leak from a Chinese laboratory or pass bellicose resolutions on Taiwan. Both would irritate Beijing but not cause a rift in bilateral relations,” says Joe Barnes, fellow at the Baker Institute for Public Policy.

Loh, therefore, sees the possibility for more stable US-China ties going forward. Having settled domestic political challenges, both leaders now hope to ensure that the international environment remains relatively calm and stable. There is, he says, sufficient desire and political will to ease tensions, with early signs looking very promising.

See also: IPEF: Empty promise or the future of trade?

Detente in Bali?
Biden and Xi’s meeting on the sidelines of the G20 Summit on Nov 14 has been seen as a possible opening for both leaders to stabilise US-China ties. This represents the first in-person meeting between the pair as presidents of their respective states. Beijing and Washington have barely spoken since Biden came into power. A more notable meeting was the heated Alaska Summit between US Secretary of State Anthony Blinken and former Chinese State Councillor and Director of the Central Foreign Affairs Commission General Office Yang Jiechi.

“I am cautiously optimistic that this will portend a more stable, predictable and hopefully less tense relationship,” says NTU’s Loh. He does not see ties normalising fully as several areas of difference continue to exist between both powers. He also sees the meeting as an indicator that both sides wish for speed bumps and guardrails to prevent competition spiralling out of control.

On Jan 3, Qin Gang, newly-appointed foreign minister of China, signalled warm ties between the two. “I have been deeply impressed by so many hardworking, friendly and talented American people that I met,” he tweeted. Qin, who was previously ambassador to the US, added that he would continue to “support the growth of China-US relations”.

But many are less optimistic. Despite the pleasant optics, the meeting readouts from the Chinese Foreign Ministry and the White House suggest a different story. Both Washington and Beijing have described the talks as “candid”, which in diplomatic parlance implies significant disagreement between both parties. Moreover, no actual progress has been forthcoming from the session although there was notably a commitment from the White House that Blinken will visit China to follow up on the discussions.

Robert Ross, professor of political science at Boston College, says that the Biden-Xi meeting stemmed more from obligation than a real desire for improved relations. “The President of the United States and the President of China cannot go to Bali and basically be in the same room and not talk to each other,” he said in a public talk organised by the Fairbank Center for China Studies at Harvard University. Refusing to speak in Bali would have given out negative signals about the state of US-China relations.

Jessica Chen Weiss, professor of government at Cornell University, sees the agreement to have Blinken visit China as a significant win. She says that the commitment to empower “key senior officials to maintain communication and deepen constructive efforts” on transnational issues represents more of an aperture than she expected. She hopes this indicates that US officials are realising that the present trajectory of US-China ties is too dangerous and detrimental to US national interests.

“Every time the two presidents meet, it helps stabilise the bilateral relationship,” says Marro of EIU. “That said, in recent years, this period of stabilisation has been shorter and shorter, given all of the structural frictions in the US-China relationship, regarding tensions over trade, Taiwan, human rights and democratic values. Given that these thornier issues haven’t really seen any breakthroughs, I don’t think we can call this a rapprochement yet.”

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The battle for chips
Despite the bonhomie at Bali, analysts see US-China relations taking a more uncompromising turn. Lawrence Anderson, senior fellow at the S Rajaratnam School of International Studies (RSIS), says that the National Security Strategy and the 2022 Chips Act suggest that the Biden Administration has moved from a policy of competition and containment towards actively degrading China’s capability to be self-sufficient in critical sectors. Together with its allies, the US wishes to prevent China from projecting military capabilities abroad.

“A significant component is the ‘decoupling’ of their respective economies. For now, the focus of the US is on national security export controls to deprive China of high-end semiconductor parts and the tools to manufacture those component parts,” Anderson writes in a RSIS commentary. He notes that the Biden Administration is trying to convince South Korean, Taiwanese and Dutch manufacturers to block Chinese access to their advanced chips and manufacturing tools.

The Chips Act represents a concerted effort by the US to re-establish leadership in the semiconductor space. Notable provisions include US$50 billion ($67.6 billion) in investments to expand domestic manufacturing of mature and advanced semiconductors, a 25% advanced manufacturing investment tax credit worth US$24 billion over five years, and US$200 billion for scientific R&D and commercialisation over the next decade.

“We need these semiconductors … for weapon systems of the future that are going to be even more reliant on advanced chips. Unfortunately, we produce zero per cent of these advanced chips now. And China is trying to move way ahead of us in manufacturing these sophisticated chips as well,” said Biden when he signed the Chips Act into law on Aug 9, 2022. “The United States must lead the world in the production of these advanced chips. This law will do exactly that,” he declared, claiming that the Communist Party of China (CPC) had sought to lobby US businesses against the bill.

So far, the Chips Act appears to have had some positive effects on the US. Moves by Taiwan Semiconductor Manufacturing Co (TSMC), Intel Corp and Samsung Electronics to build new US facilities may have been partly due to clear signals of support by the Biden Administration for chip manufacturing in the US. Yet Goldman Sachs Research (GIR) notes that Washington’s rare experiment with industrial policy is unlikely to completely reduce US reliance on Asia for chips. It only expects the Act to increase US global semiconductor market share by less than 1%.

“The industry’s capital expenditures will continue to trend up as we move towards more advanced technologies, and that capex is expected to double over the next three years and surge by a 17% CAGR, compared to just 8% over the past decade,” GSR notes. US semiconductor production is also more expensive, with a new fab costing 44% more in the US than in Taiwan. GSR sees the Act more as a means of strengthening supply chain resilience rather than to displace Asian chip manufacturing.

“More consequential for China — and Asia more broadly — will be what the US does with its export control regime, which is much more disruptive to regional trade flows. Geopolitical shocks will exacerbate a lot of challenges facing the chip sector, compounding difficulties stemming from the drop-off in global electronics demand that we’re already seeing right now,” warns Marro of EIU.

China strikes back
China is also pushing for semiconductor self-sufficiency. At the 20th Party Congress, Xi told senior party leaders that the country aims to achieve self-sufficiency in high-tech semiconductors and other industries. His administration has also committed to pursuing advanced dual-use technologies.

“We will carry out industrial foundation re-engineering projects and research projects on major technologies and equipment; support enterprises that use special and sophisticated technologies to produce novel and unique products; and move the manufacturing sector toward higher-end, smarter and greener production,” declared Xi in his report. Reuters reports that China is preparing a US$143 billion support package for its semiconductor industry to counter US pressure. However, China Semiconductor Industry Association official Wei Shaojun told South China Morning Post that industry contacts have not spoken about such a stimulus plan.

Semiconductors are also a key pillar of China’s 14th Five-Year Plan released in 2021, with Beijing eager to strengthen its domestic semiconductor sector. Beijing has announced that it will waive import taxes on raw materials and components for domestic producers of logic and memory chips with processing nodes lower than 65 nanometres. SCMP also reports that the Shanghai municipal government is subsidising up to 30% of investment — up to a total of RMB100 million ($19.5 million) — on semiconductor materials and equipment projects and investment in chip software projects.

The irony of the Chips Act is that in trying to constrain Chinese access to semiconductors, Washington may in fact be fuelling Beijing’s existing drive for self-sufficiency and innovation. “China will respond by redoubling its self-sufficiency programmes. Within three to five years, Chinese chip firms will likely approach, or even meet, the proficiency of US firms, TSMC, and Samsung,” predict Gary Clyde Hufbauer and Megan Hogan from the Peterson Institute for International Economics (PIIE).

It is unlikely, however, that complete US-China decoupling will occur. Chad P. Bown, senior fellow at PIIE, notes that despite an overall reduction in US-China trade, imports of Chinese laptops, computer monitors, phones, video game consoles and toys remain high. Leo Lewis, Asia business editor at the Financial Times, also says that the pace of decoupling has been relatively slow due to opposition from businesses, reluctance by US allies to deliberately weaken the Chinese economy, and the complexity of moving operations from China.

“Although further decoupling of the two superpowers’ economies can be expected, it is unlikely to reach the sort of separation between the West and the USSR that characterised the Cold War era. Both the US and China are currently tied to one globalised economic system,” notes Anderson. He says that China remains dependent on the EU, US and East Asian markets for access to advanced technologies. Conversely, the latter depend too much on China’s huge domestic market to cut economic ties completely.

Asean caught in crossfire
It has traditionally been Asean’s position not to choose sides between the US and China — a position that is growing more difficult as the geopolitical environment grows more polarised. Chong Ja Ian, associate professor at the National University of Singapore, told the Coexistence 2.0 Conference at Harvard that this stance arguably arose because of the need for Singapore to participate in global value chains that link the US and China. As both powers increasingly turn inward economically, such a strategy is no longer viable.

“There hasn’t been enough consideration of where things might go … what alternatives might be,” he says. He warns that Asean states framing their options purely in terms of not wanting to choose sides is an overly passive way of meeting this disrupted international environment. He sees Asean disunity as an obstacle towards developing more proactive solutions. As the US and China increasingly draw further apart from one another, trying to work with one without facing costs and punishments from the other may become increasingly difficult.

Some have raised the possibility of middle powers and smaller states who do not want to pick sides banding together to manage great power conflict through norms and guardrails. “As the world stumbles towards the Second Cold War, developing nations realise that if they want to safeguard their autonomy, the last thing they need to do is to align themselves with either of the great powers,” says Jorge Heine, research professor at Boston University. A former Chilean ambassador to China, he sees this coming in the form of stronger regional mechanisms, commitment to multilateralism and “regional coordination in global economic governance”.

Chong is sceptical about the success of a new non-alignment. He believes that states have diverse interests that would prevent them from negotiating for common goals. Additionally, he conjectures that the existing great powers will try to break up a non-aligned coalition and put pressure on them to support their interest.

But regional leaders may be mulling over the concept. “You may recall during the Cold War, the Non-Aligned Movement (NAM) came about, basically to counterbalance the rapid bipolarisation of the globe … Perhaps today, we are finding ourselves in a similar moment in history and a similar dynamic of geostrategic forces,” said Singapore Foreign Minister Vivian Balakrishnan at the 2nd Next Step Global Conference 2022 on Nov 9, 2022. He called for a “non-aligned movement for science, technology, and supply chains” to bring about a multipolar, open, and rules-based system to deal with a more polarised world.

As for businesses, Marro of EIU says that they should bear in mind that geopolitical concerns are likely to heat up again as Covid-19 risks begin to recede. Nevertheless, while supply chain diversification is indeed important to improve firm resilience, China remains an attractive market due to its strength in terms of logistics and manufacturing. Even as the risk of a big Covid-19 wave looms large in the wake of China’s rapid lifting of Covid-19 restrictions, in the long run, full removal of Covid-19 controls in China is likely to see an inevitable rebound in economic activity.

“Consequently, even as diversification occurs, it doesn’t mean we’ll see an exodus of firms from the market. At the end of the day, it’s more likely that ‘China+1’ or ‘China+2’ strategies will proliferate,” Marro tells The Edge Singapore.